By Dimitra Markoula, Consultant, Medical Technology & Diagnostics
2018 shaped up to be another strong year for European venture investment in MedTech, with the size of deals in healthcare devices and supplies enjoying a 148 per cent jump last year, according to a recent report from Pitchbook. As new technologies drive innovation in the market, the data reveals that there has been a sharp reversal of the long-standing trend that saw stagnant growth across the space in recent years.
Just last June, Cambridge-based robotics company CMR Surgical raised £75m from investors. The company is the creator of a robotics system called Versius, which has been designed to assist surgeons with keyhole surgeries. Meanwhile, the Israeli private medical device company Insightec secured £108.8m in a Series E private equity round last January. The company will use the funding to develop a state-of-the-art solution for non-invasive surgical treatments.
Yet, despite the surge of interest in the MedTech sector, as new technologies are introduced to transform patient care the number of start-ups in this fast-emerging space that have failed to successfully scale-up and turn a profit remains worryingly high. Experts may talk of a new era in healthcare driven by digital innovation, but many start-up companies are still struggling to make it past the so-called ‘valley of death,’ – the period between initial funding and creation of a commercially viable product.
Due to mounting financial pressures, increased regulatory red-tape and the transition to value-based care, certain corporate and VC investors are treading carefully in the MedTech sector. But, as Kurt van Dal from Blue Green Management Group advises, investors can reap greater rewards by becoming savvier with their investments.
He errs towards offering a true 360 solution and creating a complete portfolio of any number of different, smaller companies who can complete others within the group. Size, he asserts, is actually irrelevant – it is the potential growth of that business over the longer term that is the key determinant of whether to invest or not they invest in it.
Indeed, investors like van Dal recognise that it takes more time and money than ever before to successfully scale a tech start-up in this space; they know the lengthy process associated with research and development in the life sciences sector. Nevertheless, impatience is causing some venture funds to sacrifice potential profit in favour of immediate returns.
Venture capital funds that invest in MedTech typically see a return once they exit that investment, be it through acquisition from a larger company or when the company goes public via an Initial Public Offering. According to research from Deloitte, it appears to be taking longer now than ever for MedTech start-ups to reach the stage of maturity necessary for large companies to acquire them. In turn, early promises are failing to materialise into lasting impact.
Fortunately, this trend is not industry-wide. In fact, venture investment differs greatly depending on the individual niche. According to Christoph Ruedig, partner at Albion VC, the technology investment arm of Albion Capital, it isn’t a question of size but one of quality.
“I think on the med-tech side, it’s a more mixed picture generally. I think med-tech as an investment class in venture capital has suffered quite a lot over the last 10 years,” he said.
“CMR [Surgical] is certainly one of the exceptions, that is a very interesting company of course. Great companies with great technology always manage to raise capital. That can produce outliers and skew the numbers for the entire year.”
So, what appears to be the problem? On a whole, venture investors understand the waiting game associated with MedTech, and there’s certainly not a shortage of revolutionary ideas. It isn’t an issue with companies’ ability to innovate, rather their potential to become a key player within their particular niche. The challenge for MedTech start-ups seeking to successfully cross the valley of death and turn a profit is one that concerns personnel.
While most start-ups in the sector don’t feel the need to overhaul their team in the early stages of growth, a lack of foresight sees many companies fail to secure the candidates their business will need beyond the first few years. For some, this may be digital talent equipped with the specialist skills and attributes necessary to take the company forward during a period of vast technological advancement. For others, it could mean reviewing the structure and replacing the talent executive team with leaders capable of capitalising on opportunities at the crucial stages of growth.
Too often, entrepreneurs set up a company, develop an innovative new product that is tipped to transform the market – yet, research suggests that one out of four start-ups fail because the team they had in place was not ready for the tremendous challenges that lay ahead. As the pressure grows to make a profit, personnel-related problems become a barrier to success as managers flounder for skilled employees in an increasingly competitive market. Perhaps unsurprisingly, this pressure can quickly translate into poor hiring decisions: some place the wrong candidates while others put off recruitment altogether.
If they are to bridge the difficult period between investment and profit, MedTech firms must devise hiring strategies that address both their short and long-term needs. They also, as van Dal highlights, need to become more adept at selling the vision of the business itself. In doing so, they will win many followers who won’t just want to join the business but remain with it over the longer term.
If a change of personnel within the organisation is needed to achieve the future ambitions of the company, addressing this as early as possible will prevent start-ups from making mistakes when they find themselves in the valley of death with a truckload of great ideas but no one to implement them.